Systematic Funds Outperform Discretionary Funds

51 Pages Posted: 2 Dec 2009

See all articles by Irene Aldridge

Irene Aldridge; Cornell University;; ABLE Alpha Trading, LTD

Date Written: May 30, 2009


This article compares the performance of systematic and discretionary hedge funds. In systematic funds, most trades are originated and executed by computer programs written for that purpose. In discretionary funds, human traders make decisions when to buy and sell which financial securities. The analysis herein shows that systematic funds consistently outperform discretionary funds when performance is measured by Jensen’s Alpha. Systematic funds also exhibit lower correlation with the S&P 500 index and produce higher cumulative returns since inception, although with higher volatility.

On the basis of absolute monthly returns, systematic hedge funds outperform discretionary hedge funds whenever markets are falling. When markets are rising, however, discretionary funds tend to deliver higher absolute returns than do systematic funds. On the absolute return basis, the difference between systematic and nonsystematic funds cannot be explained by liquidity considerations: both systematic and discretionary funds deliver comparable returns in both liquid and illiquid markets.

Across a variety of other metrics, however, systematic funds perform much better than discretionary funds in limited liquidity across a variety of metrics: systematic funds produce less extreme drawdowns, higher Sharpe ratios, higher Jensen’s alpha, and attract higher Assets Under Management (AUM).

Finally, systematic funds exhibit lower skewness and kurtosis than do discretionary funds. When adjusted for skewness and kurtosis, systematic returns are statistically indistinguishable from discretionary returns, suggesting that much of systematic funds’ outperformance comes from better ability to manage extreme events, performing better than discretionary funds in crisis conditions.

Suggested Citation

Aldridge, Irene, Systematic Funds Outperform Discretionary Funds (May 30, 2009). Available at SSRN: or

Irene Aldridge (Contact Author) ( email )

New York, NY 10128
United States


Cornell University ( email )

Ithaca, NY 14853
United States ( email )

United States

ABLE Alpha Trading, LTD ( email )

New York, NY 10004
United States


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